At heart of IRS scandal: flawed 501(c)(4) rules

Congress passes laws and usually the appropriate agency can write regulations implementing the law. However, the regulations cannot contradict the law. Nevertheless, with respect to the tax law provision 501(c)(4), that is exactly what happened. Under this provision, the government provides a tax exemption to nonprofit organizations who operate exclusively for social welfare ("White House aide: Obama didn't know of IRS policy," May 20). The implementing regulation and the advice from the IRS is self-contradictory. First, the IRS states that "To be tax-exempt as a social welfare organization described in Internal Revenue Code (IRC) section 501(c)(4), an organization must not be organized for profit and must be operated exclusively to promote social welfare."

But on the same page, the IRS instruction states that: "To be operated exclusively to promote social welfare, an organization must operate primarily to further the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements)."

This latter sentence contradicts itself. "Exclusively" and "primarily" are two different animals. For more than a half century, IRS employees have been making judgments on the percent of permissible activity each applicant performs. But the law states the standard is 100 percent. That is what "exclusively" means. So that is part one of the real scandal.

During the recent presidential election, the tea party and other right-wing groups flooded the IRS with applications for 501(c)(4) status to gain tax exemptions and also to keep private their donor lists. But the purpose of these groups was clearly political. It is impossible to believe that even that even under the "principal" standard that these organizations had any purpose other than political campaigning. So these applications were improper on their face. Their very names gave that away. Bluntly, these organizations were an attempt to evade the laws relating to political campaigning.

Later, the Democrats came with a much smaller number of such spurious organizations. At least one of the latter was denied. So the second scandal is that both parties attempted to use 501(c)(4) as an end run around political campaign rules. But the Republicans were the authors and most frequent practitioners of the tax and scrutiny avoidance scheme. So that is part two of the scandal.

The IRS has nowhere near enough staff to give each tax return and each application for exempt status a full and careful review. To handle the workload screening criteria are used. For example, since their experience shows that returns claiming a home office exemption have other problems as well; that is one way to get a closer than usual scrutiny of your return. When the IRS office that handles such applications for the nation became swamped by 501(c)(4) applications, they used a screening technique based on the names on the applications. And that is the main point of contention. Worse, they apparently scrutinized and questioned Republican organizations carefully but gave most Democratic applications a pass. In this respect, they acted in an illegal way, just as in the Nixon administration the IRS responded to request for special auditing of Nixon "enemies" in an illegal way. This was the third part of the scandal and may require indictments and firings.

There are two bad results that can possibly come out of this debacle, and one possible improvement. If the 501(c)(4) section is eliminated altogether as some Democrats have suggested, then that is throwing out the baby with the bathwater. If instead, the IRS becomes afraid to give any such application a proper review that would be an even worse result.

But if the confusing, contradictory, and sometimes partisan IRS approach to such applications is replaced by a zero tolerance rule as the law requires then we will have fixed a part of our tax law enforcement that has been broken since the Eisenhower administration.

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